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Construction sector falls into contraction: PCI

Prolonged supply constraints and rises to interest rates has plunged Australia’s construction sector into a state of contraction

Following months of positive growth and stable conditions, increased pressures on the sector resulted in the construction industry falling into contraction territory, according to an industry performance index.

The Australian Performance of Construction Index (PCI), which is produced by the Australian Industry Group (Ai Group) and Housing Industry Association (HIA) each month, fell by 4.2 points to 46.2 across June.

Any measurement in the index above 50 suggests the industry is still expanding, while numbers below that mark indicate contraction.

Across the industry, three of the four construction sectors were in contraction across June. Commercial building dropped -8.4 points (38.5) while home (-4.3 to 39.2) and apartment (-4.5 to 41.7) building also fell.

Engineering construction improved however, increasing 5.3 points from May to 57.1 in June.

Labour shortages and delays in supplier deliveries continued to constrain activity across the industry, which fell significantly by -1.5 points to 46.2 Currently, the 12-month average for total activity is now in contraction at 49.3.

AiGroup director of research & economics Jeff Wilson says the constraints have placed signification pressure on the industry.

“The Australian construction sector faces significant pressure. Supply constraints for staff and materials are continuing to grow, with input prices setting a record in June. Housing, apartment, and commercial construction activity all declined further into contraction this month,” he says.

“The effect of rising interest rates was evident across house building and apartments as builders reported a drop in enquiries and new orders.”

The AiGroup PCI report also indicated builders have expressed their ongoing concerns about the increases to input prices on the index. Input prices, which also includes other expenses such as fuel, continued to increase by 4.8 points to 96.0 representing continued escalation for builders which has been prominent for over a year.

Similarly, selling prices also remain elevated (+2.3) to 82.7. The continued state of expansion for selling prices is now in its 20th consecutive month.

Staffing pressures has also impacted employment, which fell by -2.9, and is now teetering on contraction at 50.8 this month. Wages have increased by 7.6 to 83.7.

HIA senior economist Nicholas Ward says the record volume of demand for construction will see the industry be at capacity for much of this and year.

“Materials and labour shortages continued to weigh on home building in June. These constraints have resulted in increases in the cost of construction and extended build times,” Ward says.

“Demand for new detached homes and renovations has been exceptionally strong during the pandemic. There is a record volume of detached houses under construction, with more work entering the pipeline each month.

“With this large volume of work to be done, builders can expect to be at capacity in 2022 and 2023.”

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